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The Taxpayer Relief Act of 1997 was approved in both houses of Congress on July 31, 1997 and President Bill Clinton signed the $91 billion tax cut package on August 5, 1997. Among the beauty in this new legislation is a meaningful capital gains tax cut which will allows American taxpayers to unlock equities and end the spiraling cycle of "investing up." First-time home buyers will see expanded rules for Individual Retirement Accounts (IRA) and 401(k) plans, allowing penalty-free withdrawals to purchase a home. Every two years, married sellers of principal residences (who file joint tax returns) will be allowed a $500,000 exclusion ($250,000 for singles) from capital gains tax. Those who must pay will do so at a tax rate of 20% compared to the previous 28%. Depreciation recapture will be 25% for sales or exchanges, and after 2000, some properties held for five years or more will qualify for an 18% capital gains rate. There's more – a gradual increase in the estate tax exemption – from $600,000 to $1,000,000 and to $1.3 million for qualifying small businesses and family farms. All this applies to sales or exchanges occurring after May 6, 1997. For those operating a home business, home office deduction rules are clarified and an increase to 100% deductibility of health insurance premiums for the self-employed is promised. Items included in the budget-balancing and tax bills (which Congress and President Clinton approved) include: overall tax relief; overall spending recommendations; and tax changes for education, child credit, tobacco, capital gains, home sales, individual retirement accounts, estate taxes, self-employed health insurance and small business.
Realtor John Calvo states, "This is the ideal 'win-win' opportunity buyers and sellers have been waiting for. Combined with a strong market – like the one we are in – can really boost real estate sales."
• The above article is for information only. Consult with a tax professional for any tax advice.
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